Fool.com: The PseudoDrip (Fribble) August 8, 2000

Fribble The PseudoDrip

By Steven Mallas (Xtcr7@aol.com)
August 8, 2000

Grandparents love to give gifts to their grand-offspring. Parents do, too, but grandparents love it even more so. And often they bequeath shares of stock to their beloved ones as the kids get older.

But what if the grandparent doesn't own any stock and doesn't have enough money to purchase any? Or, what if the grandparent doesn't like the idea of just handing over the certificates, thinking that, besides enriching the child financially over the long-term, it does nothing in terms of educational enrichment? Or, what if the grandparent just wants to be different?

Answer: the PseudoDrip (I wonder how many out there are now experiencing feverish flashbacks to boring discussions of things protozoan in biology class).

We've all heard of dividend reinvestment plans (DRIPs), and we all know the basic premise: elimination of frictional costs so as to allow amplification of return and/or to allow those with minimal means a drawbridge to cross the moat separating Castle Wall Street from the peasants.

Capital concept.

Now let's take this concept and apply it to the gift-giving paradigm of a grandparent. Consider this: The grandparent doesn't hand over any equity issues to the grandchild; instead, said grandparent pays an entire year's worth of brokerage commissions for the child, leaving the child to buy the stock for him/herself. [Editor's note: Some arrangement would have to be made for an account to be held in the child's name -- such as a custodial account -- since a child cannot have an account until after she reaches the age of majority in her state of residence.]

And is not a kid making a minuscule amount of money an ideal candidate for the goals of a DRIP? While DRIPs are wonderful entities, isn't it an easier prospect to just hold a singular brokerage account instead of a bunch of DRIPs? Plus, it is a true elimination of all friction, because DRIPs usually have little fees associated with them?

Let's say the brokerage charges $10/trade. Well, then, the grandparent deposits $120 into the account. It won't matter if only one share is purchased each month; the full amount of the kid's investment proceeds will be at Foolish work.

And this of course brings us to the give-a-fish-teach-a-man-to-fish aphorism; it is clear that the kid will learn a whole lot more about the stock market and personal money management than he/she would have with the old way of just receiving shares.

The system might need some priming with the initial opening of the account if a minimum-balance type is chosen, but that's a small issue. I think the PseudoDrip can definitely work. And I'm sure the notion must have crossed the minds of countless others out there; ideas tend to obey the dogma of the Efficient Markets Theory. But I felt a Fribble was needed on the subject to make it even more efficient, so here it is.